Tuesday, May 22, 2012

China’s Upcoming Economic Tsunami

In a recent conversation with a trusted colleague who has
been practicing immigration law in Southeast Asia for many years, he used the
word “tsunami” to describe what he foresaw in China’s economic future.Such a perspective defies the conventional
wisdom espoused by many in the EB-5 legal and business development community, in
which there has been a consensus that China is currently saturated with the
weight of too many – hundreds! – of EB-5 projects, most of them from
Lamesville.

I agree with my colleague, and the perception that China’s EB-5
investor pipeline is slowing down is, IMHO, nonsense.The so-called “second tier” cities in China
have barely been touched; we’re talking tiny villages of less than five million
people. (-:Tsunami indeed!In recent blogs I’ve told you about various
internal events in Chinese politics which are spurring interest in emigration
within China’s emerging affluent class. Buried in my massive “to read” pile was a
May, 2011 article by Richard Hornik, a contributing editor
to the Harvard Business Review, which I long ago read and wanted to share with
you.It’s an outstanding article (you
have the link above) but there are key points which tie in with what I’ve been
saying in recent weeks:

Exactly one year ago, The Asia Society's Center
on U.S.-China Relations along with the Kissinger Institute on China issued a
report on the subject of whether the U.S. should worry about or welcome massive
inflows of Foreign Direct Investment (FDI) from its major economic competitor,
China.

The report estimated that China's outward FDI
will total $1-2 trillion by 2020, and notes that its investment in the US is
already doubling annually — albeit from a very low base.

Those of us who’ve spent the past year nurturing EB-5
projects in China would be less than honest if we did not relay a sense of
growing interest, even anxiety, from the reputable migration agents in that
country who are faced with the double whammy of investor visa unavailability in
their traditional Canadian and Australian markets along with a plethora of EB-5
projects which are more style than substance…and made all the scarier by messes
Missouri's
Mamtek fiasco. The report, predictably (given its Kissinger-esque, pragmatic
perspective), found that such impact should be welcomed:

"We conclude that
China's impacts can be managed under existing U.S. FDI doctrine: welcome the
economic benefits and competition from foreign direct investment ... screen out
all deals with specific negative security implications; and handle more general
concerns about Chinese behavior under domestic law rather than expecting the
inward investment review process to carry that weight."

But Mr. Hornik notes that reading between the lines
and in consideration of the intellectual property breaches and GOC(Government
of China)-driven cheap financing available to Chinese investors, a rational person has plenty of reason to worry. Excerpted from the report:

“…there are concerns that
China is so large and influential that its state interventions will distort
world prices and markets."

As they say at Columbia’s International Tax LLM program, “no
DUH”. (-;What is intriguing to me is that
what might trigger fear in the eyes of an educated economist observing this dynamic instead
triggers joy – and, all too often, greed – within a U.S. EB-5 sector still reeling from a banking industry which has, for all intents and purposes, frozen U.S. development as a knee-jerk
result to the financial crisis. Mr. Hornik’s article draws a great comparison to the post WWII
economic explosion experienced in Japan as witnessed by the U.S.He observes:

“…this time sheer size and the political structure of China
present a different set of concerns than those confronted a quarter of a
century ago when a whiff of hysteria playing on fears of a Yellow Peril of
Japanese economic imperialism swept the U.S. In the late 1980s, Japanese investors were
trying to buy everything from Pebble Beach to Rockefeller Center to Fairchild
Semiconductor. The gist of "The
Selling of America," a 1987 TIME cover story I reported, was that, in
fact, FDI is essential for economic growth and has played a long and valued
role in the U.S. economy dating back to the beginnings of the country.”

Let me tell you, I REMEMBER that Time Magazine cover story he wrote, way back when I was a front-line visa officer in Ciudad Juarez, Mexico and Sting still had hair. Mr. Hornik notes correctly that the past two decades of U.S. economic engagement with China has
not advanced China’s political system and that it has, in fact, regressed.Consider the GOC’s direct shut-down of China’s
private real estate market in the past year and it is clear that “economic
liberalization” is in the eyes of the beholder.As a witness to all of this, it is bewildering to me: how precisely does one reconcile the real
estate freeze with the GOC’s recent open collaboration with the World Bank in
examining the best paths for stable and open economic growth for the
nation?No clue on my end, and while Mr.
Hornik does not profess to have the answers, I will end today’s entry with his
closing words in the article, which sum things up as well as I ever could:

“No economy, least of all the profligate U.S., can afford to
reject out of hand the prospect of attracting a significant share of the $1-2
trillion in FDI that China will disburse over the next decade. But neither can
we continue under the naive assumption that somehow China's participation in
the world economy will gradually make it more willing to play by the commonly
accepted rules of global commerce and finance…”